The French Socialists to Advance Policies that will drive the Wealth Creators out of France

Posted by PITHOCRATES - July 1st, 2012

Week in Review

No one likes austerity.  Even the nations who agreed to it to join the Eurozone.  Back when they were joining they all said they would keep their deficits and debt within Eurozone requirements.  But after a prolonged recession few are willing to cut back on government spending.  In fact, in France, they’re going to increase government spending by beating up on the rich (see Adieu, la France posted 6/23/2012 on The Economist).

AFTER the French Socialists last came to power in 1981, under François Mitterrand, the new government went on a spree of nationalisations, taking over 36 banks and several industrial groups, before quietly abandoning the policy and even reprivatising a few firms. Small wonder that French bosses greeted François Hollande’s election as president with more than a frisson of foreboding. What would the Socialists do this time…?

Even before the parliamentary elections on June 17th, at which the Socialists won a majority of seats, rhetoric against factory closures had been mounting…

Michel Sapin, the labour minister, has promised to make it so expensive for companies to lay off workers that it will no longer be worth their while. Firms that fire people while still paying dividends may be penalised. Another planned ruse is to force companies to sell factories, presumably along with the brands manufactured there, to competitors rather than close them down…

[The Socialist] party’s most popular campaign promises was to tax incomes of more than €1m at a marginal rate of 75%. The likely consequences will be much less admired. Some big companies will leave France or move management abroad in order to shield their executives from the tax. That will lead them to invest and hire more overseas rather than at home. Already, top foreign executives no longer want to join French firms. A new extra tax on dividends has further angered the business world…

But the most important consequence of stratospheric taxes will be less visible, at least at first. Marc Simoncini is one of France’s best-known entrepreneurs—and one of the few business leaders to denounce the new measures publicly. Why, he recently asked, would anyone want to start a business, invest and succeed in the most taxed country in the world?

Tax is not the only threat to executive pay. Last week Pierre Moscovici, the finance minister, announced that pay for bosses of companies in which the French state holds the majority of shares will be capped at a flat rate of €450,000, or roughly 20 times the wage of the lowest-paid worker… In some cases it will lead to a 70% pay cut… Measures to limit pay at fully private firms are expected before long.

Most French business leaders don’t think that the government is deliberately targeting them. They reckon that its motives are purely political—and that the Socialists are simply not aware of the damage their plans will do (most ministers have hardly any experience of business).

Behold class warfare on a grand scale.  This is socialism.  This is what being ‘fair’ is.  This is egalitarianism.  Everyone is equal.  Except the rich and successful.  Who the state enslaves.  To serve the people.  By forcing these executives to continue to do what so few people can do.  Run these big corporations profitably.  But they won’t reward them for their unique talents.  No.  Instead, they’ll enslave them.  Force them to keep producing wealth.  To keep creating jobs.  But to do so for a paycheck that’s less than most sports stars, movie stars, singers, writers, reality stars, etc., get.  Because these executives don’t earn their pay like these people who contribute so much to the world’s economies.

The Socialists believe these rich executives don’t do anything worthy for their pay.  That these corporations run themselves and only create wealth because of the workers in the trenches.  These are the important people.  Of course if they don’t need these rich executives why not just fire them?  Let these corporations spontaneously produce wealth and create jobs?  Because even the Socialists know that these rich executives are the only ones who can run these corporations and produce the wealth they so want to confiscate.  And if they fired these rich executives and tried to run these corporations themselves there would be no wealth to confiscate.  Because they have no business experience.  And they would only run these companies into the ground.  Just like the Soviet state planners did in the Soviet Union.

How did they get here?  Their social democracies.  Cradle to grave state welfare.  The people like it.  They love the free stuff.  The problem is it’s free only to them.  Someone has to pay for it.  Primarily those who work for the rich executives.  And the rich executives themselves.  Via confiscatory tax rates on the wealth they create.  But as they drive out these wealth creators from the country what will they tax?  As populations age there are more people consuming government benefits than there are paying for them.  Which means they need to raise tax rates ever higher.  Going so far as to nationalizing businesses.  Eventually there comes a point where even class warfare won’t work anymore.  Because there just won’t be enough wealth left in the country to tax.

These policies are not likely to make things better in France.  It may feel good for a little while to punish the rich.  But punishing the rich won’t reduce your taxes.  Or improve the economy so you can advance into a better and higher paying job.  But it makes good politics.  Which is why these politicians can win elections.  In Europe.  And in the United States. 

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Roaring Twenties, Farmers, Mechanization, Smoot-Hawley Tariff, Stock Market Crash, Great Depression and Taxi Medallions

Posted by PITHOCRATES - June 12th, 2012

History 101

The New Economic Reality of Farming was that we needed Fewer Farmers in the Age of Mechanization

The Roaring Twenties was a decade of solid, real economic growth.  The world modernized during the Twenties.  Electric power, telephone, radio, motion pictures, air travel, etc.  So much of what we take for granted today became a reality during the Roaring Twenties.  But there was a downside.  Farmers borrowed money to mechanize their farms.  As farms mechanized they produced great crop yields.  Bringing bumper crops to market.  There was so much food brought to market that prices plummeted.  Reducing farm incomes so much that they couldn’t service the debt they incurred to mechanize their farms.  They defaulted.  Causing banks to fail.

By the late Twenties all the European farmers who fought in World War I were back on the farm.  And were feeding Europe again.  So not only were the Americans producing bumper crops they were losing a large export market.  Forcing farm prices down further.  There were simply more farmers than the economy was demanding thanks to the new efficiencies in farming.  But because there were so many farmers they were an important political constituency.  They were still casting a lot of votes.  So the politicians stepped in.  With a complete disregard to economic principles.  And tried to help the farmers.  With rent-seeking policies.

The farmers were hurting.  So they wanted to transfer some wealth from the masses to the farmers.  As in rent-seeking.  As opposed to profit-seeking.  Instead of creating wealth (profit-seeking) they were transferring wealth (rent-seeking).  And they did this with price supports.  They raised the price of their crops above market value.  Forcing Americans to make sacrifices in their lives so they could afford to pay higher food prices to help the farmers.  So the farmers wouldn’t have to adjust to the new economic reality of farming.  We need fewer farmers in the age of mechanization.  But it just didn’t end with higher prices.  The government would buy excess food grown by these ‘too many farmers’ and destroy it.  Or pay farmers NOT to grow food.  Then they took it up a notch.  And slapped tariffs on imported food.  Further raising the price of food.

In an Effort to raise Farming Prices the Rent-Seekers caused the Great Deflation of the Great Depression

Food tariffs were just one part of the Smoot-Hawley Tariff Act.  This act pretty much raised the tariff on everything the U.S. imported.  Greatly increasing the cost of all imports.  To protect the domestic producers from cheap foreign competition.  But there was a problem with increasing the cost of all imports.  It increased the price of whatever we built with those imports.  So much so that when they were discussing this act in Congress businesses across America knew the boom of the Twenties would end.  As did investors investing in these companies.  So even before the bill became law it caused a huge stock selloff.  Which led to the stock market crash of 1929. 

At first the higher prices helped American businesses.  Their revenue increased.  Everyone thought the tariff act was a success.  But as prices went up costs went up throughout the manufacturing pipeline.  Prices grew so high that people stopped buying.  Inventories accumulated so they cut production.  And then laid people off en masse.  Causing a great recession.  Then further rent-seeking solutions (more governmental intervention into the free market) turned that recession into the Great Depression.  What started out as a problem for overly efficient farmers turned into a national crisis.  In an effort to raise farming prices they caused the great deflation of the Great Depression.  As prices fell so did revenues.  Making it very difficult to service debt.  More people defaulted on their debt.  And more banks failed.

When the Smoot-Hawley Tariff Act became law our trading partners answered in kind.  Leading to a great trade war.  So on top of everything else what limited export markets we had shut down as well.  As the trade barriers went up economic activity decreased.  David Ricardo’s Comparative Advantage worked in reverse.  Increasing opportunity costs.  When international markets closed less efficient domestic industries took their place.  Pulling resources from more efficient uses.  Raising the cost of those resources.  Adding these cost increases on top of the tariffs.  Which further increased prices.  And further lowered economic activity.  Adding further woe onto the Great Depression.

The Medallion System dates back to the Medieval Guilds and Restricts Entry into the Cabbie Market

As the Great Depression languished on few people filled the streets of New York City (NYC).  At least few people with money who had to go places.  There were more cabs than people needed.  Supply exceeded demand.  Putting a downward pressure on taxi fares.  And increasing the time a cabbie had to work to earn some decent money.  Usually the market steps in and corrects such a situation.  Forcing some cabbies out of the cabbie business.  But not in NYC.  There they used the power of government to address this surplus of supply.  And introduced the medallion system.

This was the kind of rent seeking that dated back to those medieval guilds.  The medallion restricted entry into the cabbie market.  By limiting the number of cabs in NYC.  Every cab (at least those who can pick up passengers who hail a cab at the curb) must have a medallion permanently affixed to their cab.  Which they must purchase from the city.  Or transfer from another cab.  Currently, if you want to drive a taxi cab in NYC you better have some deep pockets.  Or have the kind of credit that lets you get a very large mortgage.  For the medallion system exists to this day.  And that medallion may cost you close to a half million dollars.

If you ever wondered why it sometimes takes so long to hail a cab in NYC this is the reason.  Rent-seeking.  As in the medallion system.  Which works just like tariffs.  Reducing supply.  And increasing prices for consumers.  So the rent-seekers can use the power of government to transfer wealth.  Instead of using innovation to create wealth.  And bringing that wealth to the market place to trade.  Instead they choose to take more wealth from the market place than they bring to it.  With the help of government.  And their rent-seeking policies.  Thus reducing overall wealth in the economy.  Which reduces economic activity.  And does nothing to help lift an economy out of recession.  Or out of a Great Depression. 

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Rent-Seeking

Posted by PITHOCRATES - June 11th, 2012

Economics 101

Wealth Creators Freely met and Made Trades they felt were Mutually Beneficial

The human race started as subsistence hunters and gatherers.  Our ancestors spent all of their time hunting.  And gathering.  If they were successful they propagated our species.  Making it possible for us to be here.  If they weren’t their family tree was a barren one. 

So that was life.  A rather short and brutish life.  Except that part about propagating the species.  And we lived that way for some 2 million years.  Eating.  Fleeing.  Fighting.  And, of course, propagating.  As we grew more intelligent we did a lot of things that ushered in the modern world.  But perhaps the single greatest advancement that brought on the modern age was our evolution from hunters and gatherers to farmers.  Everything followed from this.  We learned to live together in cities.  And we increased crop yields so much we created food surpluses.  Which gave us time to do other things.  It allowed the rise of artisans.  A middle class.  That built things and traded them for their food.  These new goods helped produce more food.  And the greater food production allowed more people to do other things.  Creating a complex economy.  Where people traveled to market with the things they created.  And traded them for the things other people brought to market.  We traded things of value for other things of value.  Because these traders, these wealth creators, each created something of value.

These wealth creators freely met and made trades they felt were mutually beneficial.  Each felt they came out a winner after their trade.  For they each received something they valued more than what they traded away to get it.  Which means going to the market was where to go to get valuable things.  Which provided an incentive to make more things so you could take them to market.  And trade for things you valued more.  As everyone did this the overall wealth in the economy increased.  People specialized.  Focused on what they were good at.  To produce as much as possible so they could trade for more.  And because they specialized they improved quality.  And used the available resources as efficiently as possible.

Rent-Seeking People took more Wealth from the Market than they Brought to It

There are many competing schools of economics.  But if you go back to where it all began what you find is laissez faire free market capitalism.  Where the profit incentive drove people to create wealth.  Which they then traded for the things they didn’t make.  Then things started to change.  Some people didn’t want to work hard and innovate.  And bring new things to market.  What they wanted was influence.  Privilege.  And a rigged market.  So they could get more in trade than the value of the things they produced for trade.  One of the first vehicles used for this was the artisan guild.

In medieval Europe if you wanted to be a blacksmith you had to join a guild.  If the guild accepted you a long apprenticeship awaited you.  But the guilds denied more people entry than they allowed.  Why?  To limit competition.  So blacksmiths could keep their prices high.  At any given time a city, town or village had a very limited number of blacksmiths.  The guild worked to keep it that way.  For the last thing these blacksmiths wanted was other blacksmiths opening up shop.  Putting more goods onto the market.  And lowering prices.  No, the guild wanted to fix prices above their market value by keeping would-be blacksmiths out of the trade.

The economic term for this is rent-seeking.  Which is sort of the opposite of profit seeking.  In profit-seeking people create wealth to trade (or to pay) for other wealth.  They work hard to earn more so they can buy more.  Both buyer and seller add wealth to the economy.  Not so in rent-seeking.  In rent-seeking you try to garner more wealth not by working harder but by using the power of government.  By getting tariffs placed on foreign competition.  By getting prices fixed above market prices.  By getting onerous regulations enacted to hurt your competition.  By restricting entrance into the industry thus limiting domestic competition.  Such as the guilds did for those medieval blacksmiths.  This interference into laissez faire free market capitalism reduced economic activity.  Because rent-seeking people took more wealth from the market than they brought to it.

The Government caused the Great Depression by Favoring Rent-Seeking over Free Market Capitalism

Some say a better name for rent-seeking is privilege seeking.  For that is what they are seeking.  Special privilege so they don’t have to compete in the free market.  For the cost of a little lobbying can remove the need for innovation.  Maintaining the level of quality.  Or satisfying customers.  For if you have a government-imposed monopoly you don’t have to do any of those things because the people don’t have anywhere else to go.

Rent-seeking is rife in crony capitalism and state capitalism.  Neither of which is true capitalism.  These companies are granted monopolies (or near monopolies) by the government in exchange for political support.  Which they can afford when they can sell their goods above market prices.  They get rich.  Their cronies in government get rich.  But the consumers suffer.  As they have to pay higher prices. Suffer poorer quality.  And less innovation.  Rent-seeking is common in the older industries.  Particularly ones with strong unions.  Who have negotiated costly wage and benefit packages.  Which they can afford to pay until new innovation and new competition enters the market.  Putting out a higher quality product at a lower price.  Prices so low that an old firm saddled with a costly union wage and benefit package simply can’t sell at and pay their bills.  So they go to government.  And lobby for privilege.

What typically happens is that they delay the inevitable.  All the protected industries in the U.S. have failed.  Textile.  Steel.  Even the automobile (well, two of the Big Three have failed.  Ford hasn’t).  For when you take more wealth from the market than you bring to it you’re just transferring wealth.  You’re not creating it.  Which is a problem.  Because you have to create wealth to increase economic activity.  So when you protect an industry you’re just pulling wealth out of the private economy and transferring it to the rent-seekers.  Who give so little in return.   Which results in a decline of economic activity.  And if it spreads enough it can and has caused recessions.  Even a Great Depression.  Such as when domestic industries lobbied government to enact the Smoot-Hawley Tariff.  Which launched an all-out trade war.  All because the government favored rent-seeking over free market capitalism.

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Marx, Engels, Communist Manifesto, Capitalists, Bourgeoisie, Proletariat, Private Property, Soviet Union, Iron Curtain and East Berlin

Posted by PITHOCRATES - May 1st, 2012

History 101

Nationalism, Socialism and Communism forced a more Fair, Just and Equitable Society onto the People

Karl Marx and Friedrich Engels published the Communist Manifesto in 1848.  Launching a war against capitalism.  And private property.  Intellectuals and those in academia loved this stuff.  And labor leaders.  Because it was a path to power.  Especially for those who could not create wealth.  Unlike the great wealth producers.  Like the industrialists.  The entrepreneurs.  Small business owners.  The productive middle class.  That is, the capitalists.  Who work hard and achieve success.  By using their talent and ability to create wealth.  Moving up the economic ladder.  Creating income inequality.  The ultimate sin of capitalism.  According to Marx and Engels.  Intellectuals.  Academia.  And labor leaders.

In the Communist Manifesto Marx and Engels single out the accumulation of private property as the source of all our problems.  The capitalists, the bourgeoisie, have an insatiable appetite for private property.  They just can’t get enough of it.  And therefore oppress their workers, the proletariat, to maximize their property.  By paying them less and less to maximize their profits.  So they can use those profits to buy more and more property.  Which keeps the proletariat in perpetual and abject poverty.  And concentrates all the wealth into the few hands of the bourgeoisie.  And the only way to correct this great inequity was through a worker’s revolution.  Where the proletariat rises up and takes the private property of the bourgeoisie and gives it to the state.  So it belongs to everyone.  Especially to those who did not create it.  A very popular idea among those mired in perpetual and abject poverty.  Who are easily swayed to support this more fair, just and equitable distribution of other people’s wealth.

These progressive views enthralled Europe.  Especially after the Industrial Revolution created some appalling conditions for workers.  And they took this opportunity to put them into practice.  It was the 19th century that gave us the ‘fair’ political systems of nationalism, socialism and communism.  That began the process of transferring wealth from the capitalists to the anti-capitalists.  Precipitating the economic decline of Europe.  Making America the new economic superpower.  Which still maintained the principles of free market capitalism throughout the 19th century.  Until the anti-capitalistic teachings of Marx and Engels took hold in the progressive government of Woodward Wilson.  Bringing back the federal income tax Abraham Lincoln used to pay for the Civil War.  But unlike Lincoln Wilson had no intention of repealing it.  The federal income tax was here to stay.  As progressives began building that more fair, just and equitable society.

The Soviet Union Depended on the West for Food because their Forced Collectivized Farms couldn’t Feed their People

But the equitable movement in America was not as intense as it was in Europe.  Or Russia.  Which was taking the teachings of Marx and Engels to their logical end.  They had a worker’s revolution.  They became communist.  And forced that more fair, just and equitable society on their people.  Whether they wanted it or not.  And those who objected they systematically killed.  Or exiled to a Siberian gulag.  For Joseph Stalin’s rise to power was brutal.  As was the Soviet Union.  Even making a deal with Adolf Hitler to split Poland after the Nazi-Soviet invasion of Poland that launched World War II.  Then Hitler double-crossed their Soviet ally and attacked the Soviet Union.  And the Nazis nearly overran them.  The Nazis were in Leningrad (present day St. Petersburg).  At the gates of Moscow.  And in Stalin’s city.  Stalingrad.  The Soviets were unable to resist the Nazi onslaught.  The only thing that saved them was material aid from the capitalist West.  The Soviet T-34 tank (the best in the war).  And, of course, the millions of Soviet people the Soviet generals could throw into the Nazi killing machine to wear the Nazis down.

No one suffered like the Soviet people did during World War II.  The US and the UK each lost about a half million people.  A terrible loss.  The Soviets, though, lost about 25 million people.  A number that just numbs the mind.  This was the second Russian invasion that had brought an enemy to the gates of Moscow.  The first were the French a century earlier under Napoleon.  There wasn’t going to be a third.  Wherever their armies were at the end of World War II they pretty much stayed.  Turning Eastern Europe into a communist bloc.  And to make the Soviet Union a mightier nation they embarked on a rapid industrialization program.  To make it a modern power like those great nations in the West.  But unlike them they were going to do it the ‘smart’ way.  With their command economy.  Where their brilliant state planners would marshal their resources and do what the free market economies did in the west.  Only instead of taking about a century their Industrial Revolution would take only 5 years.

With no industrialists, entrepreneurs, small business owners or a middle class it fell upon the state planners to industrialize the Soviet Union.  As well as feed the Soviet people.  Well, they industrialized the Soviet Union.  But never brought it up to par with the industrialized West.  Worse, they couldn’t feed their people.  Despite having some of the most fertile farmland in all of Europe in the Ukraine.  The Soviet Union depended on the West for food.  Because their forced collectivized farms didn’t work like Marx and Engels said they would.  And they didn’t work in China, either.  Where another brutal communist dictator, Mao Zedong, killed tens of millions of his people by starving them to death.  By forcing a more fair, just and equitable society onto the Chinese.

Time Froze behind the Iron Curtain and People Lived pretty much Forever in the 1940s

At the end of World War II, like at the end of World War I, no one wanted to think about war anymore.  Winston Churchill, though, did.  For he saw what the Soviet Union was doing.  And saw the spread of their communism as a threat to Western Civilization.  He gave a speech at Westminster College in Fulton, Missouri, in 1946.  And said, “From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe.”  There was now an Eastern Europe.  An East Germany.  And an East Berlin.  All behind the Iron Curtain.  All in the Soviet sphere.  All communist.  Where they all suffered under a more fair, just and equitable society.  Whether they wanted it or not.  And they clearly did not.  For the Soviets had to build a wall in Berlin to prevent those in East Berlin from escaping to West Berlin.

The intellectuals, academia and labor leaders loved Joseph Stalin and the Soviet Union.  They thought communism was the enlightened future.  Probably because they didn’t have to live in it.  But what is surprising is that a lot of college students have this affection with communism.  To this day they still wear t-shirts emblazed with the beret-wearing Che Guevara.   Who helped Fidel Castro bring that more fair, just and equitable society to the Cubans.  Who have been trying to escape it ever since by practically swimming to Florida and free market capitalism.  But the college students and their professors still yearn for a Soviet-style economy in the United States.  And condemn capitalism as they sit in coffee bars sipping their lattes.  Enjoying social media on their smartphones.  Wearing the latest fashions.  Enjoying the latest movies.  The newest music.  And dream of that more just society.  Where they redistribute wealth fairly and equitably.  And the rich pay their fair share.  Just like in East Berlin.  Where life was fair.  But it was nowhere as enjoyable as in the unfair West.

Time froze behind the Iron Curtain.  When West Berlin enjoyed the best Western Civilization had to offer in music, fashion, food, entertainment, etc., East Berlin didn’t.  For they were frozen in the 1940s.  Western music was decadent.  So instead of rock and pop music you listened to classical music.  Instead of the latest Hollywood movies you went to the ballet.  You didn’t watch Western television.  Read Western books.  Or newspapers.  No.  You only saw things approved by state censors.  And that were patriotic.  Why?  To prevent their people from seeing how much better life was on the other side of the Iron Curtain.  Where they enjoyed the latest and the best of everything.  Whereas inside the Iron Curtain you went to the black market for any real luxuries.  Like a pair of blue jeans.  Which they didn’t sell in East Berlin.  Because they were decadent.  Why, they wouldn’t even sell a t-shirt with a communist icon on it.  Because you just didn’t wear something like that in the 1940s.  But college kids will attack capitalism.  And support the fairness of socialism and communism.  Even though the things they enjoy come from free market capitalism.  And are simply not available in the communist command economy.  Because the accumulation of private property is the greatest sin of capitalism.  And not allowed under communism.

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